February 1, 2000
CHANGE OF CONTROL AGREEMENT
Dear Larry:
The Board of Directors believes that it is in the best interests of
Meritage Corporation ("Meritage"), and its shareholders to take appropriate
steps to allay any concerns you may have about your future employment
opportunities with Meritage and its subsidiaries (Meritage and its subsidiaries
are collectively referred to as the "Company"). As a result, the Board has
decided to offer to you the benefits described below.
Please bear in mind that these benefits are being offered only to a few,
selected employees and we accordingly ask that you refrain from discussing this
program with others. Also, please note that the benefits described below will
only be effective if you sign the extra copy of this Change of Control Agreement
(the "Agreement") which is enclosed and return it to me on or before February
20, 2000.
1. TERM OF AGREEMENT.
This Agreement is effective immediately and will continue in effect as long
as you are actively employed by Meritage, unless you and Meritage agree in
writing to its termination.
2. SEVERANCE PAYMENT.
If your employment with the Company is terminated without "Cause" (as
defined in Section 8) at any time within two years following a "Change of
Control" (as defined in Section 6), you will receive the "Severance Payment"
described below. You will also receive the Severance Payment if you terminate
your employment for "Good Reason" (as defined in Section 7) at any time within
two years following a Change of Control.
The Severance Payment equals the sum of (i) one times the higher of (x)
your base salary on the date of your termination of employment, or (y) your base
salary on the date preceding the Change in Control, and (ii) one times the
average of the higher of (x) your incentive compensation for the two years prior
to your termination of employment, or (y) your incentive compensation on the
date preceding the Change in Control.
The Severance Payment will be paid in one lump sum as soon as
administratively feasible following your termination of employment, but in no
event more than 90 days following your termination of employment.
You are not entitled to receive the Severance Payment if your employment is
terminated for Cause, if you terminate your employment without Good Reason, or
if your employment is terminated by reason of your "Disability" (as defined in
Section 10(d)) or your death. In addition, you are not entitled to receive the
Severance Payment if your employment is terminated by you or the Company for any
or no reason before a Change of Control occurs or more than two years after a
Change of Control has occurred.
In order to receive the Severance Payment, you must execute any release
reasonably requested by the Company.
The Severance Payment will be paid to you without regard to whether you
look for or obtain alternative employment following your termination of
employment with the Company.
3. BENEFITS CONTINUATION.
If you are entitled to severance under Section 2, you will continue to
receive life, disability, accident and group health insurance benefits
substantially similar to those which you were receiving immediately prior to
your termination of employment for a period of 24 months following your
termination of employment. Such benefits shall be provided on substantially the
same terms and conditions as they were provided prior to the Change of Control.
The Company does not intend to provide duplicative benefits. As a result,
benefits otherwise receivable pursuant to this Section shall be reduced or
eliminated if and to the extent that you receive such benefits pursuant to any
employment agreement you may have with the Company.
Benefits otherwise receivable pursuant to this Section also shall be
reduced or eliminated if and to the extent that you receive comparable benefits
from any other source (for example, another employer); provided, however, you
shall have no obligation to seek, solicit or accept employment from another
employer in order to receive such benefits.
4. INCENTIVE COMPENSATION.
If you are employed by the Company on the day on which a Change of Control
occurs, the incentive compensation to which you will be entitled (pursuant to
any performance-based incentive compensation program established by the Company)
for the calendar year in which the Change of Control occurs will equal at least
the "Minimum Incentive Compensation Amount." The "Minimum Incentive Compensation
Amount" will equal the incentive compensation to which you would have been
entitled if the year were to end on the day on which the Change of Control
occurs, based upon performance up to that date. In measuring financial
performance, financial results through the date of the Change of Control will be
annualized.
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5. STOCK OPTION ACCELERATION.
Notwithstanding anything in this Agreement or in any option agreement to
the contrary, upon a Change of Control, any stock options granted to you under
any of the Company's stock option plans shall become immediately vested and
exercisable.
6. CHANGE OF CONTROL DEFINED.
For purposes of this Agreement, the term Change of Control shall mean and
include the following transactions or situations:
(a) A sale, transfer, or other disposition by Meritage through a
single transaction or a series of transactions of securities of Meritage
representing 50% or more of the combined voting power of Meritage's then
outstanding securities to any "Unrelated Person" or "Unrelated Persons" acting
in concert with one another. For purposes of this Section, the term "Person"
shall mean and include any individual, partnership, joint venture, association,
trust, corporation, or other entity (including a "group" as referred to in
Section 13(d)(3) of the Securities Exchange Act of 1934 (the "Act")). For
purposes of this Section, the term "Unrelated Person" shall mean and include any
Person other than the Company, or an employee benefit plan of the Company, or
any officer, director, or 10% or more shareholder of the Company as of the date
of this Agreement.
(b) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of Meritage to an Unrelated Person or Unrelated Persons acting in concert
with one another,
(c) Any consolidation or merger of Meritage with or into an Unrelated
Person, unless immediately after the consolidation or merger the holders of the
common stock of Meritage immediately prior to the consolidation or merger are
the Beneficial Owners of securities of the surviving corporation representing at
least 50% of the combined voting power of the surviving corporation's then
outstanding securities.
7. GOOD REASON DEFINED.
For purposes of this Agreement, the term "Good Reason" shall include the
following circumstances: (a) if the Company assigns you duties that are
materially inconsistent with, or the material reduction of powers or functions
associated with, your position, duties, or responsibilities with the Company, or
an adverse change in your titles, authority, or reporting responsibilities, or
in conditions of your employment, (b) if your base salary is reduced or the
potential incentive compensation (or bonus) to which you may become entitled to
at any level of performance by you or the Company is reduced, (c) if the Company
fails to cause any successor to expressly assume and agree to be bound by the
terms of this Agreement, (d) any purported termination by the Company of your
employment for grounds other than for "Cause," (e) if the Company relieves you
of your duties other than for "Cause," or (f) if you are required to relocate to
an employment location that is more than fifty (50) miles from Scottsdale, AZ.
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8. CAUSE DEFINED.
For purposes of this Agreement, the term "Cause" will exist in the
following circumstances: (i) you are convicted of a felony, (ii) you engage in
any fraudulent or other dishonest act to the detriment of the Company, (iii) you
fail to report for work on a regular basis, except for periods of authorized
absence or bona fide illness, (iv) you misappropriate trade secrets, customer
lists, or other proprietary information belonging to the Company for your own
benefit or for the benefit of a competitor, (v) you engage in any willful
misconduct designed to harm the Company or its stockholders, or (vi) you fail to
perform properly your assigned duties.
9. CEILING ON BENEFITS.
The Internal Revenue Code (the "Code") places significant tax burdens on
you and the Company if the total payments made to you due to a Change of Control
exceed prescribed limits. For example, if your limit is $749,999 (because your
"Base Period Income" (as defined below) is $250,000) and the "Total Payments"
(as defined below) exceed the limit by even $1.00, you are subject to an excise
tax under Section 4999 of the Code of 20% of all amounts paid to you in excess
of $250,000. If your limit is $749,999, you will not be subject to an excise tax
if you receive exactly $749,999. If you receive $750,000, you will be subject to
an excise tax of $100,000 (20% of $500,000).
In order to avoid this excise tax and the related adverse tax consequences
for the Company, by signing this Agreement, you agree that the present value of
your Total Payments will not exceed an amount equal to 2.99 times your Base
Period Income. This is the maximum amount which you may receive without becoming
subject to the excise tax imposed by Section 4999 of the Code or which the
Company may pay without loss of deduction under Section 280G of the Code.
"Base Period Income" is an amount equal to your "annualized includible
compensation" for the "base period" as defined in Sections 280G(d)(1) and (2) of
the Code and the regulations adopted thereunder. Generally, your "annualized
includible compensation" is the average of your annual taxable income from the
Company for the "base period," which is the five calendar years prior to the
year in which the Change of Control occurs. These concepts are complicated and
technical and all of the rules set forth in the applicable regulations apply for
purposes of this Agreement.
Your "Total Payments" include the sum of the Severance Payment and any
other "payments in the nature of compensation" (as defined in Section 280G of
the Code and the regulations adopted thereunder).
If Meritage believes that these rules will result in a reduction of the
payments to which you are entitled under this Agreement, it will so notify you
within 60 days following delivery of the "Notice of Termination" described in
Section 10. You and Meritage will then, at Meritage's expense, retain legal
counsel, certified public accountants, and/or a firm of recognized executive
compensation consultants to provide an opinion or opinions concerning whether
your Total Payments exceed the limit discussed above.
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Meritage will select the legal counsel, certified public accountants and
executive compensation consultants. If you do not accept one or more of the
parties selected by Meritage you may provide Meritage with the names of legal
counsel, certified public accountants and/or executive compensation consultants
acceptable to you. If Meritage does not accept the party or parties selected by
you, the legal counsel, certified public accountants and/or executive
compensation consultants selected by you and Meritage, respectively, will select
the legal counsel, certified public accountants and/or executive compensation
consultants to provide the opinions required.
At a minimum, the opinions required by this Section must set forth (a) the
amount of your Base Period Income, (b) the present value of the Total Payments
and (c) the amount and present value of any excess parachute payments.
If the opinions state that there would be an excess parachute payment, your
payments under this Agreement will be reduced to the extent necessary to
eliminate the excess.
You will be allowed to choose which payment should be reduced or
eliminated, but the payment you choose to reduce or eliminate must be a payment
determined by such legal counsel, certified public accountants, and/or executive
compensation consultants to be includible in Total Payments. You will make your
decision in writing and deliver it to Meritage within 30 days of your receipt of
such opinions. If you fail to so notify Meritage, it will decide which payments
to reduce or eliminate.
If the legal counsel, certified public accountants, and/or executive
compensation consultants selected to provide the opinions referred to above so
requests in connection with the opinion required by this Section, a firm of
recognized executive compensation consultants, selected by you and Meritage
pursuant to the procedures set forth above, shall provide an opinion, upon which
such legal counsel, certified public accountants, and/or executive compensation
consultants may rely, as to the reasonableness of any item of compensation as
reasonable compensation for services rendered before or after the Change of
Control.
If Meritage believes that your Total Payments will exceed the limitations
of this Section, it will nonetheless make payments to you, at the times stated
above, in the maximum amount that it believes may be paid without exceeding such
limitations. The balance, if any, will then be paid after the opinions called
for above have been received.
If the amount paid to you by Meritage is ultimately determined, pursuant to
the opinion referred to above or by the Internal Revenue Service, to have
exceeded the limitation of this Section, the excess will be treated as a loan to
you by Meritage and shall be repayable on the 90th day following demand by
Meritage, together with interest at the "applicable federal rate" provided in
Section 1274(d) of the Code.
In the event that the provisions of Sections 280G and 4999 of the Code are
repealed without succession, this Section shall be of no further force or
effect.
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10. TERMINATION NOTICE AND PROCEDURE.
Any termination by the Company or you of your employment shall be
communicated by written Notice of Termination to you if such Notice of
Termination is delivered by the Company and to the Company if such Notice of
Termination is delivered by you, all in accordance with the following
procedures:
(a) The Notice of Termination shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances alleged to provide a basis for termination.
(b) Any Notice of Termination by the Company shall be in writing
signed by the Chairman of the Board of Meritage specifying in detail the basis
for such termination.
(c) If the Company shall furnish a Notice of Termination for Cause and
you in good faith notify the Company that a dispute exists concerning such
termination within the 15-day period following your receipt of such notice, you
may elect to continue your employment during such dispute. If it is thereafter
determined that (i) Cause did exist, your "Termination Date" shall be the
earlier of (A) the date on which the dispute is finally determined, either by
mutual written agreement of the parties or pursuant to the alternative dispute
resolution provisions of Section 17, or (B) the date of your death; or (ii)
Cause did not exist, your employment shall continue as if the Company had not
delivered its Notice of Termination and there shall be no Termination Date
arising out of such notice.
(d) If the Company shall furnish a Notice of Termination by reason of
Disability and you in good faith notify the Company that a dispute exists
concerning such termination within the 15-day period following your receipt of
such notice, you may elect to continue your employment during such dispute. The
dispute relating to the existence of a Disability shall be resolved by the
opinion of the licensed physician selected by Meritage, provided, however, that
if you do not accept the opinion of the licensed physician selected by Meritage,
the dispute shall be resolved by the opinion of a licensed physician who shall
be selected by you; provided further, however, that if Meritage does not accept
the opinion of the licensed physician selected by you, the dispute shall be
finally resolved by the opinion of a licensed physician selected by the licensed
physicians selected by Meritage and you, respectively. If it is thereafter
determined that (i) a Disability did exist, your Termination Date shall be the
earlier of (A) the date on which the dispute is resolved, or (B) the date of
your death, or (ii) a Disability did not exist, your employment shall continue
as if the Company had not delivered its Notice of Termination and there shall be
no Termination Date arising out of such notice. For purposes of this Agreement,
"Disability" shall be given the meaning ascribed to such term in your Employment
Agreement at the time the Disability determination is being made.
(e) If you in good faith furnish a Notice of Termination for Good
Reason and the Company notifies you that a dispute exists concerning the
termination within the 15-day period following the Company's receipt of such
notice, you may elect to continue your employment during such dispute. If it is
thereafter determined that (i) Good Reason did exist, your Termination Date
shall be the earlier of (A) the date on which the dispute is finally determined,
either by mutual written agreement of the parties or pursuant to the alternative
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dispute resolution provisions of Section 17, (B) the date of your death, or (C)
one day prior to the second anniversary of a Change of Control, and your
payments hereunder shall reflect events occurring after you delivered Notice of
Termination; or (ii) Good Reason did not exist, your employment shall continue
after such determination as if you had not delivered the Notice of Termination
asserting Good Reason.
(f) If you do not elect to continue employment pending resolution of a
dispute regarding a Notice of Termination, and it is finally determined that the
reason for termination set forth in such Notice of Termination did not exist, if
such notice was delivered by you, you shall be deemed to have voluntarily
terminated your employment other than for Good Reason and if delivered by the
Company, the Company will be deemed to have terminated you other than by reason
of Disability or Cause.
(g) For purposes of this Agreement, a transfer from Meritage to one of
its subsidiaries or a transfer from a subsidiary to Meritage or another
subsidiary shall not be treated as a termination of employment.
11. SUCCESSORS.
Meritage will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of Meritage or any of its subsidiaries to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that Meritage or any subsidiary would be required to perform it if no
such succession had taken place. Failure of Meritage to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle you to compensation in the same
amount and on the same terms to which you would be entitled hereunder if you
terminate your employment for Good Reason following a Change of Control, except
that for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Termination Date. As used in
this agreement "Company" shall mean Company, as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law or otherwise.
12. BINDING AGREEMENT.
This Agreement shall inure to the benefit of and be enforceable by you and
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder had you continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or, if there
is no such designee, to your estate.
13. NOTICE.
For purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to have
been duly given when delivered or mailed by United States certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
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that all notices to Meritage shall be directed to the attention of the Chairman
of the Board of Meritage with a copy to the Secretary of Meritage, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
14. MISCELLANEOUS.
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed by you
and the Chairman of the Board of Meritage. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreement or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware without regard
to its conflicts of law principles. All references to sections of the Act or the
Code shall be deemed also to refer to any successor provisions to such sections.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law. The obligations of
Meritage that arise prior to the expiration of this Agreement shall survive the
expiration of the term of this Agreement.
15. VALIDITY.
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
16. COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which shall
he deemed to be an original but all of which together will constitute one and
the same instrument.
17. ALTERNATIVE DISPUTE RESOLUTION.
All claims, disputes and other matters in question between the parties
arising under this Agreement shall, unless otherwise provided herein (such as in
Sections 9 and 10(d)), be resolved in accordance with the arbitration or
alternative dispute resolution provisions included in your Employment Agreement.
18. EXPENSES AND INTEREST.
If a good faith dispute shall arise with respect to the enforcement of your
rights under this Agreement or if any arbitration or legal proceeding shall be
brought in good faith to enforce or interpret any provision contained herein, or
to recover damages for breach hereof, and you are the prevailing party, you
shall recover from the Company any reasonable attorneys' fees and necessary
costs and disbursements incurred as a result of such dispute or legal
proceeding, and prejudgment interest on any money judgment obtained by you
calculated at the rate of interest announced by Bank of America, Arizona from
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time to time as its prime rate from the date that payments to you should have
been made under this Agreement. It is expressly provided that the Company shall
in no event recover from you any attorneys' fees, costs, disbursements or
interest as a result of any dispute or legal proceeding involving the Company
and you.
19. PAYMENT OBLIGATIONS ABSOLUTE.
Meritage's obligation to pay you the compensation and to make the
arrangements in accordance with the provisions herein shall be absolute and
unconditional and shall not be affected by any circumstances; provided, however,
that Meritage may apply amounts payable under this Agreement to any debts owed
to the Company by you on your Termination Date. All amounts payable by Meritage
in accordance with this Agreement shall be paid without notice or demand. If
Meritage has paid you more than the amount to which you are entitled under this
Agreement, Meritage shall have the right to recover all or any part of such
overpayment from you or from whomsoever has received such amount.
20. ENTIRE AGREEMENT.
This Agreement and your Employment Agreement set forth the entire agreement
between you and the Company concerning the subject matter discussed in this
Agreement and supersede all prior agreements, promises, covenants, arrangements,
communications, representations, or warranties, whether written or oral, by any
officer, employee or representative of the Company. Any prior agreements or
understandings with respect to the subject matter set forth in this Agreement
are hereby terminated and canceled.
21. DEFERRAL OF PAYMENTS.
To the extent that any payment under this Agreement, when
combined with all other payments received during the year that are subject to
the limitations on deductibility under Section 162(m) of the Code, exceeds the
limitations on deductibility under Section 162(m) of the Code, such payment
shall, in the discretion of Meritage, be deferred to the next succeeding
calendar year. Such deferred amounts shall be paid no later than the 60th day
after the end of such next succeeding calendar year, provided that such payment,
when combined with any other payments subject to the Section 162(m) limitations
received during the year, does not exceed the limitations on deductibility under
Section 162(m) of the Code.
22. PARTIES.
This Agreement is an agreement between you and Meritage. In certain cases,
though, obligations imposed upon Meritage may be satisfied by a subsidiary of
Meritage. Any payment made or action taken by a subsidiary of Meritage shall be
considered to be a payment made or action taken by Meritage for purposes of
determining whether Meritage has satisfied its obligations under this Agreement.
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If you would like to participate in this special benefits program, please
sign and return the extra copy of this letter which is enclosed.
Sincerely,
MERITAGE CORPORATION
By: /s/ Steven J. Hilton
------------------------------------
Name: Steven J. Hilton
Its: Co-CEO
Enclosure
ACCEPTANCE
I hereby accept the offer to participate in this special benefits program
and I agree to be bound by all of the provisions noted above.
Dated: February 2, 2000
/s/ Larry W. Seay
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Larry W. Seay
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